Changing China

Grandpa Wen, so happy to see you!

North Korea knows how to put on a show for honoured guests. Visiting Chinese Premier Wen Jiabao was this week treated to a special performance of the “Arirang” mass games, the world’s biggest choreographed extravaganza with as many as 100,000 participants.

Part circus act, part rhythmic gymnastics, the display features dancing girls, goose-stepping soldiers and a massive flip-card section animated by ranks of performers, which this time included one-off Chinese messages added for Wen.

But in the time honoured tradition of opaque Communist regimes, the slogans were likely meant as more than just a simple part of celebrations, and certainly suggested that the isolated regime keeps a very close eye on political developments in the northern neighbour that is one of its few allies.

In almost flawless Chinese they spelt out a giant welcome message that acknowledged their visitor’s populist reputation in China: “Grandpa Wen, so happy to see you!” — which may have been as heartfelt as it was enormous, given there is hardly a steady stream of top international leaders beating a path to the door of North Korean leader Kim Jong-il. 

This was matched with a string of more formal tributes to President Hu Jintao, whose official place in the pantheon of China’s top communist leaders (along with national icons Mao Zedong and Deng Xiaoping) was cemented at massive national day celebrations in Beijing on Oct 1.

“Build a harmonious socialist society,” might not sound like a rousing paean, but in fact it is one of Hu’s key slogans, part of a campaign to make the country’s growth more equal after decades of frenzied development. There was also a stodgy but politically impeccable homage to Hu’s role as general secretary of the Communist Party of China, and a nod to one of his other key rallying calls, for a “people-centred concept of scientific development.”

When he touched down in Pyongyang earlier this week, Wen became the first Chinese premier to visit North Korea since 1991, according to Beijing, and he arrived at a time when the secretive regime, shunned internationally for its nuclear weapons programme, is struggling economically in the face of a recent round of tighter sanctions.

from Commentaries:

China can be smarter on reserving more resources

China might have good environmental reasons to restrict the production of rare earth metals, but export quotas and duties are not the way to do it.

Instead, it should raise environmental standards which will force consolidation in the production of these metals, which are key to green technologies. That will improve China's environment, give it greater control over output, but reduce the risk of a trade battle.

China dominates the global production of rare earth metals -- a collection of 17 chemical elements in the periodic table that are key materials for making hybrid cars, wind turbines and smart phones. This is unusual, as China depends on imports from abroad for most of its raw materials. However, the country's control of supply has not helped it control prices.

Although demand has been rising more than 10 percent each year, prices were a third lower in 2005 than in 1990, mainly because of a surge of exports. Meanwhile, China's reserves are being used up rapidly. They now account for only half of the world's total, down from almost 90 percent in 1990.

In response, China has started to impose quotas and duties on rare earth exports in the hope that less supply might help improve prices. This has had some success: since 2004, exports from China have shrunk by about 10 percent each year. But it has angered China's trading partners. Concerned that China wants to use its resources mainly for its domestic consumption, the U.S. and EU both filed complaints with the World Trade Organization earlier this year.

China's move to restrict exports looks poorly coordinated with its recent resources acquisition frenzy. If this is how it behaves when it is the dominant supplier of a valuable resource, how can it complain that the rest of the world does not want to sell it more?

A better solution would be for China to raise environmental standards in rare earth production. This would squeeze out smaller producers and give China greater control over exports.

from Commentaries:

Bankers leave little upside for new Hong Kong IPO

A dozen or so companies have raised money in Hong Kong over the past month to cash in on rebounding equity markets, but that window is threatening to close after a string of poor debuts.

   Glorious Property was the latest, falling by 15 percent on its debut on Friday. Its poor performance came on the heels of China South City, a real-estate developer in Guangdong province, which had the worst trading debut in Hong Kong this year by falling 23 percent.     Even companies in more stable businesses, such as men's clothing retailer Lilang and sports shoes maker Peak Sport, also fell below their offer prices last month.

   One reason for the wobble is that issuers and investment banks seem to have been greedy. IPOs are generally priced at a discount to comparable listed stocks to reflect risk and to encourage trading in the after market. But with strong investor demand, they have steadily been whittling away at the discount and relying on the froth in the market to get issues away.

   Of late, IPOs have often been more than 100 times oversubscribed with institutions as well as retail investors vying for stock. Thanks to cheap and freely available money, it has been possible for investors to borrow to fund their IPO purchases. Banks have been offering interest rates on IPO loans as low as 1.8 percent.

   But market sentiment has changed dramatically, with the Heng Sang Chinese Enterprises Index <.HSCE> down almost 10 percent in the past two weeks. This has suddenly made IPOs which had set aggressive ranges seem expensive. Glorious Property actually priced its IPO towards the bottom of the range but it still received a poor response.

   From a position of excessive enthusiasm, sentiment has now snapped the other way. Retail investors have become more cautious. Some banks have stopped offering IPO loans to retail investors, which will further temper demand for new issues.

   But the message hasn't yet got through to some issuers. Las Vegas casino company Wynn Resorts priced its Hong Kong IPO at the top of its indicated range, which values it at a much higher multiple than Macau gambling tycoon Stanley Ho's flagship casino firm SJM Holdings. This looks pretty daring.

China’s 60th anniversary : Live

4:30 pm : China celebrated its wealth and rising might with a show of goose-stepping troops, floats and nuclear-capable missiles, 60 years after Mao Zedong proclaimed its embrace of communism.

The two hour-parade of picture-perfect soldiers, tanks and missiles, floats and 100,000 well-drilled civilians was a proud moment for many Chinese citizens, as reporters Ben Blanchard and Lucy Hornby write.

The weather was perfect too, with the Chinese air force deploying a "magic-like" range of chemicals and technology to clear Beijing's smoggy air.

Here's another image from the grand parade:

from Commentaries:

China might keep the weakest bank all to itself

Faced with a backlash against foreign investors, Beijing may be tempted to offer shares in the last of its big four banks to a domestic audience.

That decision may reflect China's new found confidence in the wake of the credit crisis. But it also means Chinese investors will retain full responsibility for the country's weakest bank.

The Agricultural Bank of China might end up just listing in Shanghai without any endorsement from foreign institutions, bankers close to the deal say. The bank claims it is still keeping its options open.

But if AgBank pursues this path, it would be in sharp contrast to the privatisation of China's three other large banks, all of which attracted foreign strategic investors before listing in both Hong Kong and Shanghai.

There are three explanations for this change of direction. First, China has become a lot more confident in its banks, which have weathered the financial storm better than their foreign counterparts.

This means it has less need for foreign banks to provide a seal of approval before launching a public offering. China's Social Security fund is expected to be AgBank's only strategic investor, though China Life also stands a good chance of participating, bankers say.

AgBank is probably not happy with the arrangement, as its chairman has said it wanted to have foreign strategic investors and failure to attract them will be regarded as a loss of face. But the post-credit crunch list of qualified foreign investors with deep pockets and rural banking expertise is very short.

from Commentaries:

Imagine when China runs a trade deficit

If current trends continue, China might swing to a trade deficit in the not-too-distant future. Given that China has enjoyed more than a decade of strong exports, this may sound a bit far-fetched. But even if it happens, this would not necessarily be something for the world to worry about.

Some economists have recently sounded alarm bells about the possibility of a Chinese trade deficit. They argue that if the Chinese current account surplus shrinks, it would leave Beijing with less spare cash to buy U.S. Treasury bonds. Then who would fund the U.S. budget deficit -- and, by implication, U.S. consumers?

Those worries are largely misplaced. First, it is unlikely to happen any time soon. In order for China to have a trade deficit next year, imports would have to outgrow -- or shrink less than -- exports by at least 23 percentage points.

In August, exports fell 23.4 percent while imports fell 17 percent. So while the trade surplus is diminishing, a deficit is not around the corner.

If China's trade surplus shrinks, it will most likely be caused by a contracting U.S. deficit, in which case Americans will be saving more and the U.S. will be less dependent on overseas investors to finance its government debt. That would be a sign that the long-overdue rebalancing of the global economy was beginning to take place.

It would not be so bad for the Chinese economy either, because China is a lot less dependent on exports than many people assume. Although exports have accounted for a whopping 50 percent of the economy in the past few years, the contribution of net exports to economic growth is actually much smaller, because a lot of what China sells abroad is low value-added assembly work.

In the same way, one cannot just look at China's large imports number and jump to the conclusion that China is a big end-user of the world's goods. China's imports accounted for a third of its gross domestic product last year, versus about 17 percent in the U.S. during the same period. But this is because a lot of what China imports, such as computer parts, eventually finds its way abroad.

Starbucks and the overvalued yuan

China’s close shave

 ************How would you like to sport a Tiananmen square or the Great Wall on your head ? Then just step into Jiangshanxiu salon.******National flags are placed at the entrance of the salon in Zhengzhou, capital of Henan province in central China and staff wear naval uniforms and the song ‘Ode to the Motherland’ plays in the background.******Ahead of the 60th anniversary of the People’s Republic of China, which will be celebrated countrywide on October 1, salon manager Cao Bin has given more than 30 customers patriotic cuts and styles – and says that’s only the start.******You can also choose a design from the real life models — the staff.******Becoming a walking work of art is absolutely free, it will just cost you time as some designs can take anything up to two hours.******Click below to watch the hairdressers in action.********* ******Video credit: REUTERS/Max Duncan******Photo credit: REUTERS/Donald Chan

The Pear Necessities

On a lighter note here is a story that we enjoyed this week out of China.

In the classical Chinese novel “Journey to the West” an imaginary fruit in the shape of a baby gives those who eat it immortality.

Northern Chinese farmer Hao Xianzhang is not hoping to live forever by turning fiction into fact, he hopes the fabled fruit can sell.

The 45-year-old has cultivated 18,000 baby-shaped pears in his orchard this year, hoping to find a new way to make a fortune.

A mould made out of plastic applied to young pears for a six-month growth period finally provided the desired results.

from Commentaries:

China’s start-up market can win against the odds

It is hard to be very optimistic about China's proposed stock market for start-up companies. After all, similar attempts in other countries have a decidedly mixed track record. Why would China, where small private companies face an uphill battle against state-owned firms, be any exception? Nevertheless, there are reasons to believe that the start-up market, set to debut in October, offers better potential than previous efforts in Singapore, Germany and Hong Kong. The country has a big reservoir of fast-growing small companies with real profits. In the past, they have opted for listing on foreign exchanges such as the Nasdaq. Though they were attracted by the prestige of a foreign listing, they also faced a home market that favours size over quality. Indeed, China, home of internet stars such as Baidu and Sina, is the second-largest foreign supplier of companies to the Nasdaq. But the exodus has almost ground to a halt. Beijing has tightened its grip on foreign listings because it wants to keep the best growth companies at home. Only companies which already have overseas structures can list their shares abroad, but even then they have to jump through a lot of regulatory hoops. Obtaining a domestic listing will become much easier, as Beijing has ambitious plans to float hundreds of companies on the new market each year. Maintenance fees are lower and disclosure requirements are less stringent when listing at home. And companies will not necessarily need to compromise on valuations, since Chinese equities routinely trade at a premium to their foreign counterparts because there is a lot of liquidity chasing a limited pool of stocks. Although institutional participation is likely to be limited because the small size of most start-up companies, the new market is expected to draw in a large amount of retail investors who favour more volatile small-caps. No wonder that about 150 companies have already lined up to list on the new market. With a potential universe of 50,000 private companies nationwide, there will be no shortage of new supply in the next few years. Chinese stock market regulators are wary of the lack of success by Western countries in creating markets capable of funding early-stage companies. Easdaq, Europe's answer to the Nasdaq, rumbled along for years before finally disappearing. Germany's Neuer Markt, launched during the dot-com boom, soared and then collapsed along with the rest of the stock market bubble. In an effort to make a good start, the regulator has picked companies with the best track record of sales and profit growth for the first batch of listings. Most of them already qualify to list on the market for small-and medium-size companies, which is also part of the Shenzhen Stock Exchange. The first 13 companies to go public almost look a bit too old-fashioned, with leading positions in markets such as railway transport electricity systems, lithium batteries, and medical devices. However, being boring is actually better than being too adventurous at this stage. China has set the standards for listing on the new market much higher than Hong Kong's growth enterprise market to avoid overly speculative companies. Like the Nasdaq, China requires companies to have a three-year operating record and a history of profitability. Yet while it is good to set the bar high, it is even more important to keep it there by de-listing companies promptly if they fail to comply with listing rules. One of the major reasons that the mainland market has a lot of moribund companies is because the regulator does not force de-listing. American exchanges de-list hundreds of companies a year. Beijing has finally given the green light to the market for start-up companies after 10 years in preparation because it understands that small private companies, the most vibrant sector of the economy, will be the drivers of China's next stage of growth. It also does not want to wait until the market gets too hot as then will be more speculative behaviour. Most of these markets suffer because they cannot attract a sufficient number of long-term institutional investors, so they end up as either illiquid or relying on much more speculative retail investors. This will be an even bigger problem in the retail-driven Chinese market. Although the start-up market is necessary to provide some much-needed funding for small enterprises, Beijing should avoid getting too ambitious. There were initial talks about bringing as many as 500 companies public a year. But at that speed, disclosure and approval standards will inevitably be compromised. The low success rate of markets for start-up companies has underscored the importance of not getting carried away. Early investors will walk away at the first sign of disappointment, and the markets are rarely granted a second chance. China should concentrate on getting off to a good start and build it up its new market slowly.